4 Facts Your Divorce Attorney Should know about Bankruptcy? Fact #2: Domestic Support Obligations

U.S. Bankruptcy Code Title 11 Section 101 14(A) defines a "domestic support obligation" as:

"a debt that accrues before, on, or after the date of the order for relief in a case under this title, including interest that accrues on that debt as provided under applicable non-bankruptcy law notwithstanding any other provision of this title, that is

(A) owed to or recoverable by
(i) a spouse, former spouse, or child of the debtor or such child's parent, legal guardian, or responsible relative; or
(ii) a governmental unit;

(B) in the nature of alimony, maintenance, or support (including assistance provided by a governmental unit) of such spouse, former spouse, or child of the debtor or such child's parent, without regard to whether such debt is expressly so designated;

(C) established or subject to establishment before, on, or after the date of the order for relief in a case under this title, by reason of applicable provisions of--
(i) a separation agreement, divorce decree, or property settlement agreement;
(ii) an order of a court of record; or
(iii) a determination made in accordance with applicable nonbankruptcy law by a governmental unit; and

(D) not assigned to a nongovernmental entity, unless that obligation is assigned voluntarily by the spouse, former spouse, child of the debtor, or such child's parent, legal guardian, or responsible relative for the purpose of collecting the debt.”

Domestic Support Obligations are generally non-dischargeable debts (except in some cases in a Chapter 13 after partial payment). This means that even if a spouse or former spouse files for bankruptcy, the Divorce Court can still order them to pay alimony or child support, and can still make orders relating to the collection of alimony and child support. This information is very important because it often means that an ex-spouse filing for bankruptcy can actually be helpful when alimony or child support is owed. Since the debtors other debts are now stayed and likely dischargeable, the alimony and child support will be easier to pay.

In addition, our previous post highlighted one of the ways that the category of "domestic support obligation" can be used to avoid problems such as the discharge of joint debts by categorizing certain payments as alimony.

Understanding what is and what is not a "domestic support obligation" can be very important in drafting and enforcing Divorce Agreements. In order to avoid costly mistakes for divorce clients, we encourage divorce practitioners to consult with bankruptcy counsel when there is the potential that one party in the divorce will file for bankruptcy.

Click here to read Fact #1: The Automatic Stay.

4 Facts Your Divorce Attorney Should know about Bankruptcy? Fact #3: Jurisdiction over Your Debts

The Divorce Court has the power to divide not just assets, but also debts. Just as the Court can assign the property titled to one spouse to the other spouse if the equities require, the Court can also order one spouse to pay the debts of the other spouse. But the Bankruptcy Court has the power to discharge debts. So what happens if the Divorce Court orders a spouse to pay a joint credit card debt, but the Bankruptcy Court gives that same spouse a discharge of that debt.

For purposes of this example, let's assume that the Husband and Wife were each ordered to pay half of a joint credit card debt. The Wife then files for bankruptcy and the credit card debt is discharged. Both the Husband and Wife were liable for the whole debt to the credit card company, but now only the Husband is liable to the credit card company. If the payment ordered by the divorce court is not categorized as a domestic support obligation (discussed in our next post) then the Wife no longer owes the debt to the credit card company or the Husband, and the Husband is left having to pay the entire debt.

It is possible for Separation Agreements or Divorce Judgments to avoid this problem by using assets to pay (or offset) debts, instead of trying to reassign debts. If enough assets are not available to do this then payments such as alimony, which are domestic support obligations, can be used instead to accomplish this same goal and avoid the discharge problem.

This issue can be further complicated when the debt that is at issue is a mortgage or secured debt. In order to avoid costly mistakes for divorce clients, we encourage divorce practitioners to consult with bankruptcy counsel when there is the potential that one party in the divorce will file for bankruptcy.

Click here to read Fact #2: Domestic Support Obligations.

4 Facts Your Divorce Attorney Should know about Bankruptcy? Fact #4: Jurisdiction over Your Assets

Many attorneys specialize their practice in order to better serve their clients. While concentrating on a particular practice area can help attorneys focus on making themselves the best in their field, sometimes it causes them to lose sight of the bigger picture. Divorce cases do not occur in a vacuum. When divorcing spouses face financial troubles it is important to consider the possibility of a bankruptcy and how this could affect the different aspects of a divorce.

We have put together this list of four important facts that divorce attorneys should be aware of, to help them better assist their clients who may also be facing a bankruptcy (or have a spouse who may be forced to file for bankruptcy).

Fact #4: Jurisdiction over Your Assets

When a Debtor files for Bankruptcy, they submit their assets to the jurisdiction of the Bankruptcy Court. This means that when a Debtor files for bankruptcy during a divorce case, the assets that would normally be divided in a divorce case are first subject to the jurisdiction of the Bankruptcy Court. While some assets may be joint, the spouse is merely considered another creditor with rights to the joint property that may be subject to the rights of other creditors as well.

A Bankruptcy Judge may allow the Divorce Court to make decisions relating to the division of property, but this is at their discretion, and the Bankruptcy Judge also has the right to make these decisions directly. This power applies even if the divorce has already become final. The bankruptcy laws allow the trustee to take back any items which were transfered up to two years prior to the bankruptcy filing if the transfer was not for fair value (11 U.S.C. § 548(a)(1)) or up to one year prior to the bankruptcy filing if the transfer was to an insider (11 U.S.C. § 547(b)(4)(B)). This means that the Bankruptcy Court can undo a Separation Agreement or Judgment of Divorce in favor of transferring assets from the ex-spouse to other creditors.

Finally, it is important to understand that filing for bankruptcy means that a debtor gives up their rights to decide what happens to their non-exempt assets. The bankruptcy trustee stands in the shoes of the debtor. This means that they can settle a divorce case giving up any rights the debtor may have in their spouse's property. The duty of the trustee is to the creditors not to the debtor.

These are all important consequences of filing for bankruptcy that should be considered when a bankruptcy is filed during or after a divorce case. If you are in a divorce or were recently divorced make sure you discuss this with your bankruptcy attorney. If you are getting divorced and considering bankruptcy, make sure your divorce attorney understands the consequences of filing bankruptcy or consults with a bankruptcy attorney.

Click here to read Fact #3: Jurisdiction over Your Debts.

How do I decide when to file for Bankruptcy?

There are numerous factors that dictate the best time to file your bankruptcy. Sometimes these are in your control, such as having your taxes filed, and sometime they are not, such as needing the automatic stay to delay a foreclosure proceeding.

Factors regarding the need to obtain an automatic stay will likely be dictated by your creditors, not you. The automatic stay is a useful tool in temporarily stopping foreclosure proceedings brought by your mortgage holder(s), as well as collection efforts, collection calls and lawsuits filed by your creditors, if any. This foreclosure and debt collection process generally takes a few months, not a few days, and the benefit of the automatic stay can create some additional time for the debtor to deal with logistical issues associated with preparing the bankruptcy petition, appraising assets, selling real property or finding new housing, if necessary.

In order to file for bankruptcy under any section of the Bankruptcy code (Chapter 7, 11, or 13), your federal income taxes must be filed up to the current year (2008). Other documents are necessary for preparing the bankruptcy petition and schedules, such as a credit report, current credit card statements, bank statements, and income information. If this information is not immediately available, it will take some time to collect and review. If you believe a bankruptcy filing is on the horizon, your best bet is to contact an attorney for a bankruptcy planning consultation, then begin preparing the information needed to file.

Equally important in deciding when to file is a debtor's own ability to handle the current situation, balanced against their need to make immediate changes. Some debtors will need time to prepare for relocation to an apartment or smaller home, whereas others will be anxious to take action to save their house or get a fresh start. These factors are unique to each case, and should be discussed with an attorney before filing your bankruptcy petition.

Can I Use My Credit Cards Before Filing for Bankruptcy?

The U.S. Bankruptcy Code at 11 U.S.C. § 523(C) sets forth evidentiary presumptions allowing the bankruptcy trustee or an individual creditor to automatically presume a particular credit card purchase or cash advance is non-dischargeable. If the presumption applies and is not rebutted with evidence introduced by the debtor, the debtor [you] will continue to owe that particular debt.

Specifically, the code states that a debtor’s discharge will specifically exempt from the discharge:

(I) consumer debts owed to a single creditor and aggregating more than $600 (as of April 1, 2010) for luxury goods or services incurred by an individual debtor on or within 90 days before the order for relief under this title are presumed to be nondischargeable; and

(II) cash advances aggregating more than $875 (as of April 1, 2010) that are extensions of consumer credit under an open end credit plan obtained by an individual debtor on or within 70 days before the order for relief under this title, are presumed to be nondischargeable.

As a result of 11 U.S.C. § 523(C), debtors are advised to make no purchases on credit cards in the three months (90 days) prior to their bankruptcy filing in order to ensure that the above presumption does not attach, and significantly reduces the likelihood that the trustee or a creditor will object to the discharge of a particular debt.

Unfortunately, sometimes it is not possible to wait the full 90 days. Some debtors need to seek the protection of the Bankruptcy Court to prevent foreclosure, to stop a pending lawsuit, or prevent repossession of a particular secured asset. In these cases, many debtors will have made recent purchases within the 90-Day period. It is important to discuss these purchases with your bankruptcy attorney, as things like travel, vacations, electronics or computer purchases may all be deemed “luxury” under the statute.

At the §341(a) meeting, nearly all Chapter 7 Trustees in Massachusetts will ask whether a creditor has “used any credit card in the past 30 days prior to filing bankruptcy”. The trustee is attempting to evaluate the likelihood that an 11 U.S.C. § 523(C) Complaint to Object to Discharge will be filed. While use of credit cards in the 30 days prior to filing is not proof of abuse (and grounds for nondischargability), it would raise the trustees suspicions that further investigation is warranted. As such, at Kelsey & Trask, P.C., we recommend that all creditors do not use any credit card or create any new debt in the 30 days prior to filing a Chapter 7 Bankruptcy case.

Dealing with House Debt: Short Sales, Foreclosures & Bankruptcy - Part III

In this Three-Part Post, we will evaluate some of the different methods of dealing with real estate debt when a mortgage modification or forbearance agreement is not an option.

• Part I addressed the most common scenario which forces a homeowner/borrower to consider how to deal with property he or she can no longer afford.


• Part II will address short sales and their interactions with Bankruptcy.


• Part III will address "walking away" from a property through bankruptcy, and the resulting foreclosure by the lender.

Part III: Bankruptcy & Foreclosure

A final option is to simply file for bankruptcy, and indicate that the debtor's intention is to surrender the property to the bank. (For purposes of this post, I will not address how a Chapter 13 Bankruptcy can save a house from foreclosure). Procedurally, the Bankruptcy case will progress through the Bankruptcy Court, and eventually the secured lender will seek permission from the Bankruptcy Court to be relieved of the automatic stay protections, and begin foreclosure proceedings. Regardless of whether the foreclosure auction is completed by the bank before or after the debtor's discharge (meaning they no longer owe certain debts, including the mortgage debt), any deficiency from the foreclosure auction is discharged by the bankruptcy court. From the debtor's perspective, the whole process is completed through the bankruptcy, and does not require any specific participation directly with the lender.

This option provides a swift resolution to the issue of past-due mortgage debt, the pending foreclosure on the property, and any mortgage deficiency all in one process that, in the case of a Chapter 7 Bankruptcy, can be completed from filing to discharge in under six months. It is best utilized when the lender will not agree to a short sale, when there is insufficient time to arrange a short sale, or when the debtor's other financial concerns (such as collection actions on other debt) require immediate action. It also does not require the lender's permission or cooperation - provided you qualify for bankruptcy, the Bankruptcy Laws dictate the result, not the lender's business decision.

The credit implications of a foreclosure and bankruptcy (or in the context of bankruptcy) are more detrimental than a short sale followed by bankruptcy, if the debtor wants to obtain a mortgage again in the future. Following a foreclosure, the debtor will have great difficulty in obtaining a future mortgage for the 10-year period that the foreclosure will remain on the debtor's credit report for mortgage and employment purposes. The foreclosure will not appear on the debtor's consumer credit report for 7 years following the foreclosure, meaning credit cards and car loans will be more easily attainable at that point.

Dealing with debt can be a daunting challenge for many individuals. Don't go alone. An attorney with Kelsey & Trask, P.C. can help you make these difficult decisions, and help you with the process. For an initial consultation, click here, or call 508-655-5980.

Dealing with House Debt: Short Sales, Foreclosures & Bankruptcy - Part II

In this Three-Part Post, we will evaluate some of the different methods of dealing with real estate debt when a mortgage modification or forbearance agreement is not an option.

• Part I addressed the most common scenario which forces a homeowner/borrower to consider how to deal with property he or she can no longer afford.


• Part II will address short sales and their interactions with Bankruptcy.


• Part III will address "walking away" from a property through bankruptcy, and the resulting foreclosure by the lender.

Part II: Short Sale (and maybe Bankruptcy)

In a short sale, the bank or mortgage lender agrees to discount a loan balance because of an economic or financial hardship on the part of the borrower. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender. Borrowers are able to mitigate damage to their credit history, and partially control the debt. It does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer. The borrower must work directly with the lender to seek approval of the short sale by the bank, obtain a purchaser, and complete the transaction before any foreclosure proceedings are completed. (In some cases, the bank may have initiated foreclosure proceedings, in addition to contemplating consent for the short sale.) Timing is critically important, and the debtor is an important part of the short sale process.

Short sales are a type of settlement, and they adversely affect a person's credit report, though the negative impact may be less than a foreclosure. Depending upon other credit information, it may possible to obtain another mortgage 1-3 years after a short sale, or even sooner if the borrower is current at the time of the sale.

However, if the individual does not then pay off the deficient portion of the mortgage (the unpaid portion of the mortgage after the short sale proceeds were applied to the balance), the lender can take further legal action against the debtor to collect the unpaid portion of the mortgage, which may include trustee process attachments, garnishments, or seizure of other assets, depending on the debtor's other property. The debtor may, after the short sale is complete, file for Bankruptcy upon completion of the short sale to discharge any deficiency and extinguish any further liability to the lender.

In this scenario, a foreclosure will never appear on the debtor's credit report. Although the Bankruptcy and Short Sale will appear on the debtor's credit report, some members of the mortgage lending agency will extend first mortgage financing, and even sub-prime mortgage financing, to prospective borrower with a bankruptcy that did not involve mortgage debt in as little as 3-4 years after the bankruptcy, provided the debtor has reestablished credit and used it responsibly during that time. Even if the bankruptcy included a small portion of mortgage deficiency debt, the fact that it did not include a foreclosure action will result in the debtor's credit healing much more quickly than if the debtor also went through a foreclosure during or before bankruptcy.

Deciding which option to pursue can be a daunting challenge for many individuals. Don't go alone. An attorney with Kelsey & Trask, P.C. can help you make these difficult decisions, and help you with the process. For an initial consultation, click here, or call 508-655-5980.

Dealing with House Debt: Short Sales, Foreclosures and Bankruptcy - Part I

In this Three-Part Post, we will evaluate some of the different methods of dealing with real estate debt when a mortgage modification or forbearance agreement is not an option.

• Part I addressed the most common scenario which forces a homeowner/borrower to consider how to deal with property he or she can no longer afford.


• Part II will address short sales and their interactions with Bankruptcy.


• Part III will address "walking away" from a property through bankruptcy, and the resulting foreclosure by the lender.

Part I: How did we get here? Where exactly is "here"?

Many homeowners today have negative equity in their homes, that is, they owe more on the mortgage than their homes is worth. This may be due to any number of factors, most commonly resulting from a combination of purchasing the property during the "housing bubble" of the early to mid 2000's, jumbo mortgages which finance 90% or more of the purchase price, and the use of "home equity loans" to fund consumer expenses. If you are current with your mortgage payments and plan to stay in your home, the "solution" to this problem is to basically wait out the market until home prices rise again or you have paid off enough principal of the mortgage to create positive equity in the property.

Homeowners encounter serious problems when they cannot pay (and have not paid) the mortgage and they have negative equity in the property. Perhaps the homeowner took on a mortgage payment that they could not afford - i.e., purchased "too much house" - or some other temporary situation has impacted the homeowner's finances such as an unexpected medical expense, loss of a job or other significant interruption in income. In any case, the bank may be threatening foreclosure, the homeowner is in jeopardy of loosing their home, and the value of the property at foreclosure auction is not enough to pay off the balance of the mortgage, resulting in an individual liability by the former homeowner to the bank for tens, if not hundreds, of thousands of dollars.

At this point, homeowners weigh their options and understand that they can no longer afford to keep the house. They can't afford the payments, and realize it is a loosing proposition to struggle to pay into a property that has negative net value. Assume for this scenario that the debtor's financial situation does not permit a mortgage modification. Perhaps the mortgage has already been modified; the borrower does not qualify for a modification; a modification has been denied; or the borrower's income is insufficient to to continue to make any payments, due to job loss or medical illness. After conducting some research, the homeowner is now weighting two options: A Short Sale of the property and/or Bankruptcy.

... to be continued...

Dealing with debt can be a daunting challenge for many individuals. Don't go alone. An attorney with Kelsey & Trask, P.C. can help you make these difficult decisions, and help you with the process. For a free initial consultation, click here, or call 508-655-5980.

Avoid These 3 Traps Before Filing Bankruptcy

A significant majority of Chapter 7 Bankruptcy filings are completed without any significant problems to the Debtor or objection by Creditors, provided the Debtor (and their Counsel) properly and accurately discloses all necessary information required by the bankruptcy laws. However, the bankruptcy laws provide the grounds for creditors to object to the discharge of debts (meaning you will still owe the debt, even after filing bankruptcy)under certain circumstances.

A creditor may object to the discharge of amounts owed to them by the debtor under certain circumstances. If a creditor objects to the discharge of any of the debts listed in your petition or schedules, such objection must be raised within 60 days after the first scheduled §341(a) Meeting of Creditors. Alternatively, the trustee must move to dismiss your case within the 60-day period following the §341(a) Meeting of Creditors if he or she finds that the granting of relief would be an abuse of the provisions of Chapter 7.

So, what are traps to avoid objections to my petition?

Trap 1: New Debts Immediately Prior to Filing
If you incurred new debt of $500.00 or more for "luxury goods or services" within the 90-day period before your bankruptcy, or if you obtained a cash advance from a credit card or other loan in the amount of $750.00 or more within the 70-day period before your bankruptcy filing, that debt is presumed to be non-dischargeable, absent the debtor's showing to the contrary.

Trap 2: Debtor Dishonesty in Obtaining Debt
A creditor may object to your request to discharge a debt if the debt was obtained or incurred as a result of fraud, embezzlement or larceny, or any willful or malicious injuries you have caused others. If the Creditor establishes by a preponderance of the evidence that the debt was obtained by any of the above means, the debt will be deemed non-dischargeable.

Trap 3: Debtor Dishonesty in Filing for Bankruptcy
Creditors may object to the discharge of certain debts if you have concealed or destroyed any property or financial records; made any false statements in connection with incurring a debt or other financial obligation; withheld financial or other material information; failed to explain losses; failed to respond to material questions permitted under the Federal Rules of Bankruptcy Procedure; or if you were granted a discharge with respect to that debtor in a prior bankruptcy case filed within the last 6 years.

So, in conclusion, the best advice to consider if you are considering bankruptcy is to stop spending, or at least stop incurring new debt, and ensure you understand and completely disclose your financial history. As in the rest of life, honesty is the the best policy.

What do those "Debt Relief Agencies" Do? Do they work?

It seems every time you turn on the radio, TV, or go online, you see stories of individuals in financial trouble, and plenty of businesses, agencies and organizations offering to help them out. Recently, one particular “debt relief agency” has touted its “quick fix” services by encouraging consumers to stop paying their credit cards and “not more money to those greedy banks”. The service then promises to work with consumers to resolve their debt for “pennies on the dollar”. So, do debt relief companies such as the one described deliver on their promises?

Most debt relief companies operate like so: You pay them a flat fee, usually calculated as a percentage of your total debt, and sign a power of attorney over to the debt agency allowing them to “negotiate with your creditors”. You are then told to stop paying your credit cards. After you have stopped paying the minimum balances, credit card companies begin collection action against you, and may refer your case to a collection agency. Afterward, the “debt relief agency” will step in and make a lowball offer to the collection agency or creditor, which the credit card company may or may not accept.

I have received a number of calls recently from consumers that have paid “debt relief agencies” thousands of dollars to assist them in resolving credit card debt, only to find themselves in a far worse position: liens on property, wage garnishments, even foreclosure. The fact of the matter is that word is getting out about debt relief agencies, and more and more lenders are becoming unwilling to settle with the individual debtors, and rather seek resolution in court or through foreclosure. In most cases, the debt relief agencies are not licensed to practice law, so as soon as a debt collection lawsuit or foreclosure proceedings are commenced, the consumer is left high and dry, still in debt and hundreds or thousands of dollars out of pocket.

The success of any debt relief agency is completely dependent upon the creditor’s willingness to settle the debt at a fraction of what is owed. There is no obligation of a creditor to accept a settlement offer or reduce your debt to any amount other than what is actually owed. Bankruptcy is different, and in a bankruptcy case the Bankruptcy Court is essentially ordering the discharge of certain debts and does not rely on a third party’s ability to settle a case. However, only the United States Bankruptcy Court can compel the discharge of certain debts, and only if the laws and procedures for filing bankruptcy are followed. Bankruptcy is not the only option (or even the first or best option) to overcoming a financial problem, but it may play an important part in the debtor’s strategy, and in certain circumstances, be the last and best option for a fresh start.

New Income Based Repayment Program May Reduce Student Loan Payments

Although student loan debt can almost never be discharged trough bankruptcy, a new program which went into effect on July 1, 2009 called Income-Based Repayment (IBR) may provide some relief for those who cannot afford high monthly federal student loan payments.

The U.S. Bankruptcy code at 11 U.S.C. 523(a)(8) specifically deems student loan obligations as “nondischargeable debt” (i.e., debt that cannot be discharged through a bankruptcy filing) absent a showing of “undue hardship”, which, as contemplated by the code, is a nearly impossible standard to prove.

Fortunately, the IBR program may provide some relief. IBR cannot be used to obtain an outright discharge of student loan debt, but it can help borrowers keep their loan payments affordable with payment caps based on income and family size; often capping IBR loan payments at less than 10 percent of their income household income. IBR will also forgive remaining debt, if any, after 25 years of qualifying payments.

IBR is available to federal student loan borrowers in both the Direct and Guaranteed (or FFEL) loan programs, and covers most types of federal loans made directly to students, but not those made to a student’s parent.

The IBR program requires that participants be qualified based on income, and to be eligible, it would take more than 15 percent of your income above 150% of federal poverty level to pay off your loans on a standard 10-year payment plan. IBR uses a sliding scale to determine your adjusted federal loan repayment amounts. If you earn below 150% of the federal poverty level for your family size, your required loan payment will be $0. If you earn more, your loan payment will be capped at 15 percent of your income above that amount. In most cases, that figure works out to less than 10 percent of your total income. A useful calculator to determine your eligibility is available here.

In some situations, your reduced payment under IBR may not cover the interest on your loans. If so, the government will pay that interest on your Subsidized Stafford Loans for your first three years in IBR. After three years and for other loan types, the interest will be added to the total amount you owe. While your debt may grow if your IBR calculated payments are calculated to be lower than the monthly interest, anything you still owe after 25 years of qualifying payments will be forgiven.

While student loan debt remains essentially nondischargeable, the IBR program can be used obtain meaningful relief from individuals seeking to reduce student loan payments to qualified participants.

If you are struggling with student loan debt, mortgage debt, credit card and consumer loan debt, the IBR program can be one part of a comprehensive legal strategy to address and resolve financial problems.